Panel Moves Forward With Recommendations for a Separate Private Company Financial Reporting Board

A
more detailed outline of what would be a blue ribbon panel
recommendation for a new private company accounting standard-setting
board began to take shape Friday. The new standard-setting board
could have between five and seven members with private company
financial reporting experience, an estimated $4 million annual
budget and face a sunset provision of five years or less to evaluate
the overall process, under a draft plan.

Panel
Chairman Rick Anderson said the goal is to present a report to the
Financial Accounting Foundation, FASB’s parent organization, by Jan.
20. That date will allow FAF trustees time to review the report
prior to discussing it at their Feb. 15 meeting and deciding what
steps to take next, he said.

The
mission of the proposed new board is, “to establish exceptions and
modifications to U.S. GAAP for private companies, while ensuring
that such exceptions and modifications provide decision-useful
information to lenders and other users of private company financial
reports,” not to issue new standards, according to the draft report.
“That mission is accomplished through a comprehensive and
independent process that encourages broad participation, objectively
considers all stakeholder views, and is subject to oversight by the
FAF’s Board of Trustees.”

Although
this is consistent with FASB’s mission, panel members emphasized the
word “lenders” demonstrates how this board would be different from
FASB, saying that lenders constitute the largest user base of
private company financial reports.

As
proposed, the new board would have the authority to modify existing
and future GAAP for private entities and FASB would consider input
from all entities during the standard-setting process. The panel
believes both boards should work closely together in their endeavors.

There
was some debate as to whether FASB should be able to cite potential
exceptions and delayed implementation time for private companies--as
it does currently--or whether that task should be left to the new
board alone. Many panel members expressed interest in having an
advisory group or groups similar to the existing Private Company
Financial Reporting Committee (PCFRC) to express the opinions of
that constituency to both FASB and the new board.

All
the panel members supported a “sunset period” after which the new
processes that are adopted could be revisited. The staff’s initial
suggestion was five years, but many members favored a shorter
timeframe--some suggested three years--to encourage faster progress.

One
of the largest remaining unanswered questions is where the funding
will come from for this new board. Revenue from FAF publications
could constitute part of the funding, but not all, panel members
agreed. They reasoned that there are companies that would be willing
to subsidize the process, but did not decide how to organize
securing the funding.

Regardless
of what the panel, and ultimately FAF, recommends, the staff did not
recommend returning to a system where standard-setting bodies would
have to rely on year-to-year voluntary contributions desired, again
due to concerns around potential independence issues.

Anderson
emphasized that the panel’s recommendations must still be
deliberated by FAF and that whatever the foundation decides will be
exposed to the public for comment. Because of the time necessary to
do that and to establish a new board, creating a new board and the
accompanying infrastructure and policies could take, “a good
portion” of 2011, according to panel staff, who suggested the panel
make a list of short-term or transitional actions by the FAF and/or
FASB to move toward creating standards that are most applicable to
private companies.

One
of the top transitional recommendations is to fill one or both of
the two FASB board positions created in August with individuals who
have primarily private company background and experience.

The
draft proposal also suggested FASB starting work on the creation of
a broad set of differential criteria that articulates what
differences private companies have from public companies. Panel
members agreed this framework would be of critical importance to
serve as the basis for making appropriate modifications and
exceptions for private companies. Some members cited the criteria
used by the International Accounting Standards Board in its IFRS for
SMEs standard.

The
18-member panel is a joint effort by the AICPA, FAF and the National
Association of State Boards of Accountancy. It was created in
December 2009 to provide recommendations by the end of 2010 on the
future of U.S. accounting standards for private companies.